The Who: Talking About a Bargain in US Large Cap

Dear Fellow Investors:

As we approach the end of 2012, those of us at Smead Capital Management are struck by how helpful the band, The Who, could be to those who are interested in relative performance. Their comments on demographics, psychology and relative value are as beneficial to the contrarian investor today as they were 40 years ago when their songs were first popularized.


People try to put us d-down (Talkin’ ’bout my generation)
Just because we get around (Talkin’ ’bout my generation)
Things they do look awful c-c-cold (Talkin’ ’bout my generation)
I hope I die before I get old (Talkin’ ’bout my generation)

There are 85 million Americans in the echo-boomer category. Thanks to the temporary implosion of the housing market, deepest recession since the 1930’s and very high unemployment levels, this is a group which has been historically slow to get married, have kids and buy houses. By being stuck in what some call “extended adolescence”, these boomer kids have been easy to “put d-down”. Hollywood understands what goes on in culture and has provided us with movies and television shows about twenty-something’s living with friends or at home, engaging in sexual exploits and participating in bachelor and bachelorette parties, where they “get around”. When it comes to being a positive force in our economy, things looked “awful c-cold” for this group and some have thought that the economy would “die before they get old”.

However, there is good news. The Wall Street Journal reported on November 6th, 2012 that household formation jumped in the year ended September 30th of 2012.

Americans are setting up house at the fastest rate in more than six years, an indication that recession anxiety, which prompted adult children to move in with their parents and single people to postpone marriage, is starting to ease.

The nation added 1.15 million households in the 12 months that ended in September, according to the most recent Census Bureau data. That is a significant rise from the past four years when an average of 650,000 households were formed annually. While what economists call “household formation” is running a little lower than the average 1.25 million added annually during the boom years, the latest data nevertheless represent an important shift.


I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
And I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again

Very smart people have told us since the beginning of 2009 that everything has changed. They tell us that our economy won’t make a “normal” comeback from the deep recession. They’ve sought to convince us that the only reason that the US equity market has rebounded is manipulation by the Fed. They “take a bow for the new revolution” in commodity markets and call it “a permanently higher plateau” in Malthusian dialect. They “smile and grin at the change all around me” and tell us that the only way to succeed is play the emerging market’s production of new middle class people. THEY TRIED TO FOOL US! If you are under-invested in US large cap and US equity in general, we believe you have been “fooled” by those experts and have been paying a serious performance price for it. “DON’T GET FOOLED AGAIN”.

We have believed and invested under the premise that the anemic recovery has been a function of historically high commodity prices, depression-level housing starts and the slow employment transition to the “new revolution” where the virtual/online economy meet up with the “real” economy. We assumed that very low housing activity and auto buying would translate to outsized gains for those that sell everything else. We have been positive about the stock market, because it has a history of treating you well in the years following other deep recessions and massive liquidations like we saw from 2007-2009. Lastly, we believed that asset allocators have prolonged the anemic recovery by bidding up commodities for diversification purposes and economic experts have done a great job of scaring our largest population group (echo-boomers).

Relative Value

I’d gladly lose me to find you
I’d gladly give up all I had
To find you I’d suffer anything and be glad

I’d pay any price just to get you
I’d work all my life and I will
To win you I’d stand naked, stoned and stabbed

I’d call that a bargain
The best I ever had
The best I ever had

What did you need to do four years ago and what do we believe you need to do now? Four years ago you needed to bet that we would survive and rebound. Now you need to “gladly lose” your ownership of the popular investments of the last ten years (gold, oil, commodities, emerging markets). We think you should “gladly give up all you had” in short duration investments designed to protect yourself from the next Armageddon. You need to not “pay any price just to get” commodities and you need to embrace an optimistic future based on the idea that this population group will get married, have kids and buy houses! Here is how the Wall Street Journal writer, Robbie Whelan, explained the future:

Rising household formation, which is tied to employment growth, means more students are finding jobs when they leave college, more adult children are leaving their parents’ homes and more couples feel confident enough about the future to tie the knot. It could also mean that immigration is picking up.

“During the recession, a lot of those major life events like marriage, children and migration were put on hold,” said Kenneth Johnson, a senior demographer at the University of New Hampshire’s Carsey Institute. “It may be that there are couples who are thinking about living together, and they’re thinking, ‘The jobs picture is getting better. It’s time to make the next step.'”

We believe “to win” you need to risk “standing naked” and having “stones” thrown at you. In our view, you need to believe that long duration common stock investing, while lonely, is best practiced right after major economic cleansings. You need to look at last week’s American Association of Individual Investor poll (, where nearly 49% of individuals were bearish as compared to less than 29% bullish on stocks. You do this when all the negative economic expert nabobs attempt to cause this to “be a bargain” which on a relative basis could be “the best I’ve ever had”!

Best Wishes,

William Smead

The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. It should not be assumed that investing in any securities mentioned above will or will not be profitable. A list of all recommendations made by Smead Capital Management within the past twelve month period is available upon request.

This Missive and others are available at Smead Blog.

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